Coworking giant WeWork is reportedly on the brink of filing for Chapter 11 bankruptcy protection in New Jersey, according to sources cited by the Wall Street Journal.
This potential filing should not come as a major surprise for those following WeWork's struggles. The company warned in August that "substantial doubt exists about its ability to continue as a going concern." WeWork has faced declining demand and pandemic troubles that compounded its longstanding issues.
Years of Declining Demand
WeWork's troubles did not suddenly arise with the pandemic. Even before COVID-19, demand had been steadily decreasing over time for its coworking spaces.
As early as 2019, analysts warned of dangers like overvalued rents and Questionable management practices. But the company pushed aggressive expansion plans.
Once seen as a revolutionary startup, critics increasingly viewed WeWork as emblematic of Silicon Valley excess. The company aimed to disrupt commercial real estate, but struggled with profitability.
WeWork attempted a disastrous IPO in 2019 that collapsed due to public scrutiny of its finances and leadership. The company required a controversial bailout from SoftBank to survive.
Pandemic Devastates Office Demand
In early 2020, the COVID-19 pandemic decimated demand for WeWork's office spaces. Companies abandoned offices for remote work as lockdowns began.
WeWork's reported revenue dropped from $1.1 billion pre-pandemic to just $593 million in Q2 2020. The company laid off thousands of employees to cut costs.
Although WeWork positioned itself as more resilient than traditional offices, its occupancy rates plunged over 30% at the pandemic's height. The remote work revolution undermined its core business.
Uneven Post-Pandemic Recovery
As pandemic restrictions eased, some companies returned to in-person work in 2021 and 2022. But office demand did not rebound to pre-2020 levels.
Many businesses opted for hybrid remote policies rather than fully on-site. Demand for flex space lagged as companies signed traditional long-term leases.
WeWork attempted to reinvent itself, such as rebranding as The We Company. But financial struggles continued as rents and occupancy lagged.
Q2 2022 earnings showed a 4% revenue increase but membership declined 3%. Supply still exceeded demand in struggling commercial real estate markets.
Bankruptcy Filing Looms
With its business model faltering, WeWork warned in August 2022 filings that bankruptcy could occur. By October, WeWork was scrambling to restructure debts to avoid chapter 11.
The company missed bond interest payments and entered talks with creditors like SoftBank and Goldman Sachs. But renegotiating its massive liabilities proved challenging.
Seeing bankruptcy as increasingly inevitable, WeWork has reportedly hired lawyers to prepare a potential filing in New Jersey. This could come in the near future if its talks with creditors fail.
Stock Collapses on News
Word of WeWork's potential bankruptcy sent its already struggling stock plunging over 47% in after-hours trading. Its price hit a new 52-week low of $1.21 per share.
This gave WeWork a market capitalization of just $121 million - a massive fall from its $47 billion valuation after SoftBank's 2019 investment.
WeWork's stock had struggled since going public via a SPAC merger in 2021. Its business model's viability remained uncertain to investors. The bankruptcy threat compounds longstanding worries.
For SoftBank, its massive WeWork investment may prove disastrous if bankruptcy wipes out its stake. SoftBank originally poured over $10 billion into WeWork before cold feet in 2019.
Conclusion: The Collapse of a Unicorn
WeWork's potential bankruptcy filing represents a dramatic fall for a company once seen as a hot startup unicorn. Its vision of disrupting commercial real estate proved unsustainable.
Years of questionable management and excessive growth undermined WeWork's lofty ambitions. Declining pre-pandemic demand was exacerbated by COVID-19's effects on offices.
A bankruptcy could offer WeWork a fresh start after restructuring. But investors face massive losses from bets on WeWork's concept. For SoftBank and others, the WeWork investment will stand as a cautionary tale of buying into hype without due diligence.
If filed, WeWork's bankruptcy will close the book on a startup viewed as epitomizing "tech bubble" excesses. Despite visionary promises, the realities of economics and market demand could not be ignored forever. WeWork's story is one of high-flying hopes colliding with cold business truths.